The wild cards that could send China into a tailspin aren't looking that wild

It hasn't been two weeks yet and 2016 has already been a
difficult year for the Chinese economy.

The country's major stock indices have declined around 15%, and
the Chinese yuan has depreciated 1.5% against the US dollar.

Key economic indicators
look weak, and overcapacity and debt are major
structural issues.

But there's still hope that policymakers can manage the
situation.

Unless, of course, things get out of control.

In her 2016 outlook, star China analyst Charlene Chu of
Autonomous Research outlined a number of possible "wild cards"
that could push this situation beyond repair.

The thing is that, right now, a lot of the wild cards don't look
so wild.

Here's the rundown from Chu's report:

Further expansion of
deflationary pressures to the broader economy that would begin
to undermine the values of all assets, most importantly
property, and lead to a change in behavior throughout all
levels of the economy;

A shift in focus of the
corruption crackdown to the banking sector, including branch
managers and credit officers, which could bring a rapid halt to
the rollover of some credits and more hesitation to extend new
credit amid an economic slowdown;

Increased international trade
frictions from a depreciating CNY and increased dumping of
excess goods in international markets;

Bond market volatility that
leads to losses in banks' securities portfolios and off-BS
[off-balance sheet] wealth management products, leading to an
unwind of the second balance sheet;

Stress in Hong Kong, where a
significant change in the investment or business climate and/or
a loss of confidence could spark a large outflow of funds as
has happened on occasions in the past. Growth of Hong Kong's
banking sector has been extremely brisk over the past decade,
and large outflows could be destabilizing.

Reuters

Let's go over Chu's risks point by point:

On Monday, we got an
indication that deflationary pressure is still present.
The country's consumer-price index came in well below the
government's 3% target at 1.6%. More importantly, the
producer-price index — which tracks wholesale prices for
companies —
came in at -5.9%. It's the 48th consecutive month PPI
has been negative.

Chinese President Xi Jinping's anticorruption campaign has
made waves in the financial sector, with a number of high-profile
bankers finding themselves caught up in the operation. The
campaign hasn't yet extended to smaller actors in the banking
sector, but the probe is ongoing, so stand by on that one.

All of the pressures forcing the yuan down a week ago —
including deflationary pressure and thinning corporate margins —
are still very much in play. The Chinese government set the yuan
higher on Monday, but the negative PPI read was a signal that the
government will likely continue depreciating the currency to make
goods more competitive. The lower the yuan goes, the more
tempting it is for neighbors to lower their currencies as well.

A year in the
yuan/USD.Google
Finance

We've talked a lot about how much China's corporate bond
market has exploded over the last year and change. The government
has kept interest rates low to keep money flowing through the
economy and cash poor, debt-laden corporations are taking
advantage.

As you can see, there are a lot of moving parts here. For
example, the country needs the yuan lower to be competitive, but
it doesn't want to set its neighbors off. It needs companies to
stay alive, but it also needs to cut off the spigot of easy debt
that's accumulating on everyone's balance sheets.

I would not want to be a Chinese central banker this year — too
much devil in these details.